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An Introduction to Blockchain, and What it Means for Retail’s Future

Perhaps you’ve heard the term blockchain in the news. Maybe in your mind, it’s synonymous with Bitcoin. Maybe you haven’t come across it yet.

We’ve been reading up on this technology and its applications to the retail world, and we think blockchain has the potential to change the future of retail.

Read on for a summary of blockchain in layman’s terms, the industries it’s reaching, how it could alter retail, and its disadvantages—with added insight from our experts.

In layman’s terms: what is blockchain?

Blockchain is a new type of database—a digitized, transparent ledger of transactions. This system stores information across a network of personal computers (also called “nodes”), making the database decentralized and distributed. Each node stores a copy of the ledger, so it is near impossible to amend. This continually growing ledger is comprised of individual blocks of transactions, linked and secured via cryptography, so it is very difficult to hack.

The blockchain network helps us democratize trade, allowing peer-to-peer transactions without the role of intermediaries—relying on technological trust instead of that of a middleman.

Blockchain is difficult to articulate in just a few words, so here are a few definitions from a range of sources:

The New York Times sums it up very simply: “Blockchain allows information to be stored and exchanged by a network of computers without any central authority.”

Our Financial Services team describes it as: “A digital platform on which participants can agree at regular intervals about the true state of shared data, without the need for a third party.”

Last Week Tonight’s John Oliver says: “Blockchain allows a record, or ledger, of every transaction ever made to be stored not in one place—but across a vast number of computers—allowing for decentralization and the advantages of speed to security. This ledger resides in thousands of computers—that you can’t hack.”

When did it first start?

Blockchain has been described in the media as the technology that undergirds Bitcoin and other cryptocurrencies. Bitcoin was the first blockchain to ever exist, created back in 2009 by an unknown person (or group of people) under the name Satoshi Nakamoto. It was released as open-source software as a new kind of database for virtual currency, storing transactions without the involvement of middlemen like banks or governments. After Bitcoin, other public blockchains like Ethereum and AIX popped up in the marketplace as alternatives to today’s currencies, with the financial industry trying to figure out how to use technology to trade these cryptocurrencies.

Anyone can buy cryptocurrencies like Bitcoin, but many people also “mine” for them without having to put down any money. The mining process involves using computers to solve complex algorithms to try to verify previous transactions and validate the next block.

There has been a lot in the news about young “crypto kings” in their crypto castles, getting rich off investing in Bitcoin and other cryptocurrencies. This hype has caused many people to use the terms Bitcoin and blockchain interchangeably.

But make no mistake—blockchain is not Bitcoin. Adam Bhatti of our Financial Services team offers this analogy for comparison: blockchain is to Bitcoin as the internet is to Facebook—it is the mechanism on which Bitcoin runs, giving Bitcoin its utility. Blockchain will do for transactions what the internet did for communications, allowing you to track everything to a T.

Beyond Bitcoin

Indeed, Bitcoin is only one application of the blockchain technology within the payments world, where financial transactions are stored on the ledger. A deluge of other blockchains—spanning the industries of government, non-profits, healthcare, retail, and more—have popped up in the marketplace with the goal of democratizing all sorts of transactions. Here are a few examples:

Applications in retail

Despite it being a buzzword, our Chief Retail Advisor, Marshal Cohen, urges that “while blockchain might have less relevance in the world of retail as we know it today, it will in the future—and we must seek to understand its relevance in a retail context, and how it might play out for brands and retailers.”

Group President of Retail, Don Unser, added, “it’s not just about payment methods or transparency among sourcing—but a much broader discussion. This technology has the potential to affect 360 degrees of a company, spanning customers, suppliers, and every piece of the business.” Our NPD team believes a range of blockchain technology developments might affect the following areas of retail:

Blockchain technology can maintain long records of any data sequence, beyond financial trades. In the case of supply chain management, these data points might include when a product is purchased, or the shipping logs from manufacturers to consumers—without the ability to falsely edit data for personal benefit. With blockchain, you can track the origins of anything from a tee-shirt, to an apple, to a luxury bag.

Imagine documenting transactions in permanent, decentralized records, monitored securely and transparently. This could significantly reduce time delays and human mistakes, and monitor cost, labor, waste, and emissions at every point in the supply chain. In the food sector, a food manufacturer could automatically identify contaminated products in a matter of seconds, and wouldn’t need to pull an entire product line from store shelves in the case of contamination.

Blockchain also has the potential to enable both manufacturers and consumers to understand the environmental impact of products—a particularly powerful tool given consumer interest in companies that demonstrate corporate social responsibility. Our Justin Stile, Executive Director, Client Development, believes blockchain offers a unique opportunity for brands to be leaders in transparency. Even if your products aren’t the least expensive, you can develop consumers’ trust by giving them a view into everything behind your products.

Walmart in China uses blockchain to source its pork all the way from the pig to the customer, enabling the retailer to provide transparency to all players in the system. The retailer also has a patent on drone delivery systems that facilitate orders in a cleaner way, tracking package contents, environmental conditions, location, and other details.

Coca-Cola is starting a pilot using blockchain to track humane labor practices, to better fight forced labor across its sugar supply chains. The brand has plans to create a secure, decentralized registry for workers and their contracts, to help securely record workers’ identification while providing a trail in case employers abuse their power.

Many inventory management platforms and solutions for retailers are popping up across the map, for example, Provenance, which creates open, real-time digital records of every inventory item to help retailers and producers “open product data, track the journey of goods, and empower customers with access to knowledge.” Other examples include Hijro and Skuchain.

How do consumers verify that what they received in the mail is indeed what they intended to purchase? How can manufacturers and distributors confidently prevent counterfeit goods from being incorporated into their final product, especially when a single product often uses parts from different sources?

Blockchain offers a possible solution to these challenges with its decentralized ledger that can store a history of transactions across a shared database. By making the record accessible and verifiable from anywhere in the world, blockchain can enable the authentication of goods and eradicate the criminal element of counterfeit goods in the retail supply chain.

By pairing hardware chips with blockchain technology, a product can take on a digital history, going as far back as the raw materials that were used to make the product. This in turn allows retailers and consumers to verify their purchased products are genuine.

VeChain: embeds customized chips into luxury products, allowing manufacturers to trace the product end-to-end, and the consumers to scan a product with a mobile app to instantaneously know whether it’s real and learn about how it was made.

Forget about Bitcoin and Ethereum. What if retailers developed their own cryptocurrency that required customers to use it as currency? Instead of paying for online purchases via credit card, the customer could send payment transfers via the blockchain, cutting out retailer fees paid to credit card companies and other third parties. Such a move could allow retailers to lower prices and incentivize consumers to shop at one retailer over a competitor.

If large companies like Amazon, Walmart, or Starbucks issued digital coins that inspired public trust, blockchain-based cryptocurrencies might gain acceptance by the public and other retail giants.

This payment method could play into loyalty programs, as well. Imagine if brands could better move audiences to action with blockchain-based referral rewards. Start-up Loyyal is exploring this very application, enabling companies to offer more personalized redemption options in an efficient manner, and allowing companies with similar target audiences to pair up to increase customer loyalty.

Because blockchain allows trade without a central authority, another application is directly connecting buyers and sellers without a middleman and associated fees. One such company experimenting with this model is Open Bazaar. It boasts the ability to “buy and sell freely”, allowing vendors to create stores, sell anything, without platform fees—being paid in cryptocurrency. Users can browse small businesses from more than 30 countries, buying products that span music to short-term rentals, and paying with a choice of more than 50 cryptocurrencies.

Another blockchain-based platform, Soma, creates a digital community where users buy and sell items or services through a peer-to-peer network with transparent history and feedback.

Can you imagine if this free marketplace gained wide-spread adoption? What might that mean for the role of the modern retailer?

After multiple data breaches, companies are stepping up their customer data security. Blockchain is one approach to the challenge of protecting consumer data.

This is where private blockchains some into play. Our Financial Services team explained that private blockchains allow users to dictate who can participate in the network, removing the chances of foul play.

Walmart recently filed patents that could allow the retailer to store vendor and consumer e-commerce payment data using blockchain technology to improve security. Specifically, this blockchain technology would encrypt payment information in digital shopping systems and create a network able to automatically conduct transactions on behalf of a customer. The payments would be received by one vendor or more, depending on the services and who provided them. Data providers like YouGov are even turning to blockchain to ensure compliance with consumer privacy regulations.

“Data transparency is becoming increasingly important. With consumers more conscious of how their data is used and stored, blockchain may offer an additional level of transparency,” added Marshal Cohen.

Beware the limitations

We’ve highlighted potential benefits of blockchain, but it’s important to recognize that this technology is still very much in its infancy, and has also received criticism for its possible limitations:

Public acceptance barriers

Blockchains are only as strong as their network of users. While many companies are having success with private, permissioned blockchains, unless blockchain technology gains mass public trust and support from central authorities, it will be difficult to reap its full benefits. And in order for there to be a full-blown revolution, many societal, governance, and technological barriers must fall.

Susceptible to human error

The information going into the database must be recorded accurately from the get-go. The “garbage in, garbage out” philosophy applies to blockchain databases, too. But it’s very difficult to completely eliminate the factor of human error.

In supply chain blockchain, for example, certainly there’s a risk that someone could lie at the beginning of the chain and state a false truth; in the case of Coca-Cola’s pilot, participants must ensure they meet their country’s labor requirements when creating contracts for their workers. But the blockchain can’t force companies to adhere to the conditions of the contracts. While the technology can shine a light on each point of the system that could deter these types of incidents, the system is not yet tamper-proof.

Justin Stile on NPD’s Financial Services team believes that as blockchain and IoT become more sophisticated over time, companies may be able to reduce the human element of error by combining more Internet-connected devices with blockchain, to more effectively manage supply-change management.

Security breaches

The blockchain’s system of computer nodes presents a security flaw. If more than half of the computers tell a lie, the lie will become the truth. This requires close monitoring by a blockchain’s community, and history has shown that blockchain exchanges are not immune to hacking. In 2014 a Bitcoin exchange in Japan was hacked, leading to $450 million stolen. As recently as December 2017, hackers made off with $70 million from a Slovenia-based cryptocurrency mining service, and there are more hacks where that came from. Even though these breaches have been specific to cryptocurrency exchanges, these incidents have led to concerns around the security of other types of blockchains.

With these security breaches in mind, NPD’s technology industry advisor Stephen Baker challenged blockchain’s potential to secure, track, and verify the chain of transactions for any product or service or activity. “While I understand the value of secured transactions across the supply chain and why that would be of high interest to retail, I am skeptical that total security is within the realm of possibility with today’s technologies (or even tomorrow’s). Software is still riddled with bugs and errors; semiconductor production, for example, while a miracle every day, does not produce totally reliable replicable results every single time. And I don’t believe blockchain can’t be manipulated or hacked.”

Energy inefficiencies

Another downfall to the blockchain is the issue of irresponsible energy consumption—especially with cryptocurrencies. Since each blockchain node runs a copy of the blockchain, every computer on the network repeats the same task, multiplying the electricity and costs required to power the blockchain.

Mining Bitcoin, for example, is incredibly energy intensive. When computers try to solve complex algorithms to validate the next block, this requires a large amount of energy. But it is worth noting But it is worth noting that there are other ways to verify transactions on the blockchain that don’t involve the process that Bitcoin uses.

Learn More

For more on retail trends – or to discover how you can measure performance, predict future performance, and improve your marketing and product development, visit npd.com or our LinkedIn page. Questions? Call us at 866-444-1411 or email contactnpd@npd.com.

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